Why Do Corporate Bonds Yield More than Treasury Bonds

Professor Francis Longstaff and student Eric Neis say the differences between corporate bond and treasury bond yields is accounted to more than just risk premium.  Marketability and liquidity have a very strong influence on the yield of the bond as well. 

To quantify the differences, they conducted a study on the yield of the corporate bond.  There were three key components that made up this study; corporate bond prices, a gauge of the expected losses due to default which was quantified by prices of credit default swaps, and the yield of riskless bonds such as that of the treasury.  This data was derived from the Federal Reserve, Bloomberg and Citigroup.

They then went on to build a mathematical model which would quantify the probability of default.  Not only did this model involve expected rate of default, but it also took into consideration the marketability, or liquidity, of the corporate bond.  The study was focused on understanding the marketability component of corporate bond pricing. 

The study revealed the following results:  the marketability spread seemed to vary by different corporations or industries, the marketability spread seemed to be larger when the transaction amounts were larger, and larger overall issuances of corporate bonds by companies resulted in a higher marketability spread. 
Tim Ord
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